Your Two Bits

I think we have all heard that there are great tax benefits to home ownership, but is that accurate? For one, I’m not sure that you get any tax breaks for owning a home—at least not where I live. If you’re paying a mortgage, you do get a tax break for the interest you pay; however that means you don’t truly own your home yet.

I have heard people say they want to get into a home for the tax benefits. The problem is that the tax benefits aren’t that great. They don’t warrant buying a home, and they certainly don’t warrant never completely paying off the mortgage, which I have heard argued. To understand why, simply look at your income tax filings.

We recently did our taxes and paid over $6,500 in interest on our mortgage last year. Including that interest as a tax deduction in our tax filings made a difference on the taxes we owed. The table below shows the difference in what we would owe or get refunded based on whether we included the mortgage interest as a deduction.

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The difference between what we would pay with interest and without interest is $1,396, basically $1,400. In a sense, paying $6,500 in mortgage interest saved us $1,400 in taxes, but it’s really not even that good. Which sencario would you prefer?

• Scenario A: Pay $6,100 ($6,500 in interest minus $400 tax refund—remember this is a refund of my own money)
• Scenario B: Pay $977 ($0 in interest plus $977 in taxes)

I’d rather have the home paid for and pay the $977 in taxes.

So as you prepare your taxes this season or if the illusion of great tax benefits are factoring into your consideration of buying a home, look at the real numbers of what the tax benefits will mean. If you don’t have a mortgage, it’s easy to figure out how much you would pay in interest using the Excel loan amortization calculator I showed last week.

Feel free to share your two bits.

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• Do You Know How Tax Brackets Work?
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• How to Calculate a Loan or Mortgage with Excel

After last week’s post about the budget template, it made me think of another template I love that comes as part of Microsoft Excel: a loan or mortgage calculator, with an amortization table. I created a little demo video showing you how to find it and explaining the basics of how it works.

I found this template after complaining to my friend, Ben, about needing a tool that would help me figure out how long it would take to pay off my mortgage. Near the beginning of the mortgage, I paid an extra $30/month towards principal, then later started paying something more like $70. There were also a few random cases where I had a freelance job or got a tax return and would put that money towards the mortgage principal. There weren’t any loan calculators out there that provided a simple way to accommodate those variations in additional principal payments. My friend suggested I make one in Excel. When I went to do that, I discovered there was a template that did exactly what I wanted. Thanks, Ben!

If you have a loan or mortgage, you really need to try this out. I find it highly motivating for paying off debt, because it makes it easy to see exactly what will happen if you apply different amounts. The video explains it all.

Feel free to share your two bits if you are aware of any enhancements or even of other templates you have found useful.

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